Morning comment: Japanese inflation & final wages, EA consumer confidence

Chris Scicluna
Emily Nicol
Mantas Vanagas

A slow start to the week in the US saw the S&P500 gain 0.1% on low volumes on Monday, in large part thanks to a 2% rally in energy stocks as WTI jumped to almost $66/bbl – levels last seen in late October – following news that the US would scrap waivers that had permitted the purchase of some crude oil from Iran. Treasury yields nudged higher (the 10Y yield rising 3bps to 2.59%) while the US dollar was fractionally weaker. In Asia, markets have been somewhat mixed but generally little changed today during a session that was devoid of first tier data. Equities weakened slightly in mainland China but Japan’s TOPIX gained 0.3%, despite a disappointing outcome from revised February’s labour earnings figures (see below for more details). Australia’s ASX200 led the pack, rising 1.0% as energy stocks rallied. Markets were little changed in South Korea, Hong Kong and Singapore, however.

Looking ahead, it should be a relatively quiet day in Europe with just the Commission’s flash consumer confidence indicator for April most noteworthy, while in the US new home sales figures are due for release.

Ahead of the conclusion of the BoJ’s latest Policy Board meeting and publication of updated economic forecasts on Thursday, focus in Japan over recent days was on February inflation. Beginning with Friday’s CPI, in seasonally-adjusted terms the headline index was unchanged for a second consecutive month in March, but base effects meant that the annual inflation rate still picked up 0.3ppts to 0.5%Y/Y – an outcome that was in line with market expectations. More importantly, the measure used by the BoJ in its quarterly Outlook Report forecast – which excludes fresh food prices from the CPI – was also unchanged in March, but annual growth still picked up an unexpected 0.1ppt to 0.8%Y/Y, thus erasing the decline reported in February. Within the detail, energy prices rose a further 0.7%M/M (up 5.1%Y/Y) with petroleum product prices rising for the first time since October and the price of electricity and gas rising modestly too. Nonetheless, the BoJ’s preferred measure of core prices, which excludes both fresh food and energy prices, was unchanged in March, which was sufficient to leave annual inflation on this measure steady for a third consecutive month at just 0.4%Y/Y – in line with market expectations. The measure of core prices that strips out all food items and energy fell 0.1%M/M, leaving its annual inflation rate steady at an even lower 0.3%Y/Y. Elsewhere in the detail, prices for non-energy industrial goods increased 0.5%Y/Y – the most since July 2016 – but sadly annual inflation in the services sector fell 0.1ppt to 0.3%Y/Y.

Meanwhile, today’s release of the BoJ’s measures of “underlying inflation” showed its gauge of trimmed mean CPI – which the Bank’s research suggests is correlated with the output gap – rose 0.5%Y/Y in March, up 0.1ppt from February but in line with the average reading over the past 12 months. The weighted median CPI – which is less correlated with the business cycle – rose 0.2%Y/Y, up 0.2ppt from its February reading. A net 20.1% of goods and services reported prices rises over the past 12 months – the largest proportion in 13 months but still a little below the average recorded over the past two years. Meanwhile, the BoJ reported that the PPI services index increased 0.7%M/M in March – not dissimilar to that seen in the same month a year earlier so that, in line with market expectations, annual inflation remained steady at 1.1%Y/Y. Within the detail, transportation prices, which have a weight of just under 20% in the overall index, rose a steady 2.0%Y/Y. However, prices for information and communication services, which account for nearly a quarter of the overall index, fell 0.2%Y/Y. A 1.4%Y/Y increase in the price of ‘other services’, accounting for a third of the overall index, was driven by higher prices for engineering and employment agency services.

Today’s release of final results of the Monthly Labour Survey for February also offered little hope of a near-term boost to inflationary pressures. Unfortunately, the figures were little changed from the very odd preliminary report, with the headline measure of total labour cash earnings (per person) now recording a 0.7%Y/Y decline in February – just 0.1ppt improved from the preliminary finding and still the weakest outcome since June 2015. Bonus payments fell an estimated 31.4%Y/Y in February – a slightly smaller decline than estimated previously – while contracted earnings fell an unrevised 0.2%Y/Y. By contrast, the final estimates indicate that scheduled earnings of part-time workers increased 2.5%Y/Y on a per hour basis – revised up 0.2ppt from the preliminary report. Meanwhile, scheduled monthly wages for full-time workers grew 0.7%Y/Y – revised up 0.3ppt from the preliminary report. As we noted at the time of the preliminary report, the particularly severe weakness in the headline (per person) earnings data seems to be due to oddities in the employee count, especially as regards part-time workers. According to the final report the number of regular employees rose an estimated 2.0%Y/Y in February – 0.2ppt above the already implausibly strong preliminary reading (now unchanged from January, with both months contrasting sharply with the 0.8%Y/Y lift that had been reported in December. The number of part-time employees was estimated to have increased 5.0%Y/Y, revised up from the preliminary estimate of 3.6%Y/Y. By contrast, the full-time employee count rose 0.6%Y/Y, revised down from the preliminary estimate of 1.1%Y/Y and now unchanged from the January reading. Meanwhile, aggregate hours worked (per person) were reported to have declined 0.8%Y/Y in February, slightly below the 0.6%Y/Y decline that had been estimated in the preliminary report.

Euro area:
Following last week’s disappointing flash euro area PMIs – which saw the composite PMI unexpectedly fall to 51.3, below the average seen in Q1 and only just above the 5½-year lows seen at the turn of the year – this week’s flow of sentiment indicators gets underway this afternoon with the Commission’s flash consumer confidence. In contrast to the decline in the PMIs, the headline consumer sentiment index is expected to report the fourth consecutive modest improvement this month from -7.2 in March, albeit still leaving the index well below the average of last year.

With no top-tier UK data due for release today and Parliament returning from its Easter recess, Brexit will no doubt be back in the limelight. Certainly, as cross-party negotiations continue this week, Theresa May is facing increasing pressure from within her party to step down, with members of the 1922 Committee reportedly expected to discuss this evening a potential change to the rules to enable a new leadership challenge in June, while local Conservative Party association bosses will hold a non-binding confidence vote on May’s leadership at an extraordinary general meeting within weeks.

While focus this week will no doubt be on Friday’s first estimate of Q1 GDP – with our expectations for a modest pickup in growth from 2.2%Q/Q annualised in Q4 to around 2½%Q/Q ann. – today will bring the new home sales report for March and the Richmond Fed manufacturing survey for April. With mortgage rates having fallen, sales of new homes have risen in recent months, although, in line with yesterday’s soft existing home sales release, the latest figures are expected to report a decline in March from an eleven month-high of 667k in February. 

Categories : 

Back to research list


This research report is produced by Daiwa Securities Co. Ltd., and/or its affiliates and is distributed by Daiwa Capital Markets Europe Limited in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority and is a member of the London Stock Exchange and Eurex Exchange. Daiwa Capital Markets Europe Limited and its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the “Securities”), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe Limited and its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients.

This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.

Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at  /about-us/corporate-governance-regulatory. Regulatory disclosures of investment banking relationships are available at